For business owners, there are many kinds of expenses, but they all fall into the same set of categories: short-term expenses like supplies, raw materials and other consumables and long-term expenses like equipment, office space and electronics. The value of these long-term assets is expected to be more than a year and ideally a long time, meaning that when you are calculating the business’s relevant income, it’s time to begin calculating depreciation of assets as a line item. When it comes to calculating depreciation of electronics, you'll need to understand both the general IRS rules for depreciation and more specific ways to treat electronics.
What Is Depreciation?
Depreciation itself is a way to capture the decrease in the value of an item or asset over time. This decrease in value is due to physical wear and tear as well as obsolescence and captures the change in value of an asset over time. For example, a new car will not be worth the same amount of money 10 years after purchase. Depreciation is the capture of that change in value as well as how the value changes over those 10 years.
In accounting and bookkeeping, depreciation is the line item in the budget that captures the decrease in the value of assets over the last year and the net worth of current remaining assets for the purposes of budgeting and taxation. Depreciation is different than consumption. Supplies and assets consumed entirely within a period simply count as expenses, while assets that depreciate are used but not immediately consumed.
This normally applies to large assets like buildings, equipment and machinery. These long-term assets lose value over time at different rates and often have a salvage cost that represents the final value of the asset at its end of life. There are a number of different ways to calculate depreciation of an asset, and each business’s finance and accounting departments are expected to have a set of standards by which they abide for their company’s internal calculations.
Electronic Asset Depreciation Chart
The calculation of depreciation for a business’s electronic assets is important because it can provide a reduction in taxes owed. This is because an electronic asset’s depreciation value within a year can be listed as an expense for that year. These additional expenses will reduce taxable income, which reduces the amount of taxes owed.
Depreciation of electronics for tax purposes can be different than accounting book depreciation. The United States has a collection of strict laws describing electronic equipment and how it may be depreciated for tax purposes. Alternatively, accounting book depreciation often tries to better capture the real value left on the electornic asset. Electronic equipment carries its own specific rules when it comes to depreciation since the items are considered long-term assets.
Electronic Items Depreciation Rate
Small businesses without factory-type equipment may still deduct depreciation on their electronic devices provided that they are used for business purposes. In the United States, businesses often use straight-line depreciation for electronics. This means the depreciation value is the same every year over the years of the asset’s useful life.
The general way to calculate this sort for depreciation is to take the initial cost of the asset, subtract what its value will be at the end of its life and then divide that value by the number of years of life. This is called the straight-line basis. For example, consider the following camera depreciation rate. Say a $500 camera is needed for business and will be used only for business. It can be recycled for $50 at the end of its life five years later. Thus, the annual depreciation value will be ($500 - $50) / 5, which is $90 a year over that five-year period.
If, however, the camera is only used for business 75% of the time, and 25% is personal use, the business may only deduct that portion of the depreciation. In this case, $90 x 75% is $67.50; this $67.50 then becomes the depreciation value over the five-year period. Businesses may not deduct depreciation — which represents the wear and tear on an asset — due to personal use. The IRS does have the right to ask a business owner to prove how much of an asset’s use is business related and how much is personal.
Importance of Purchase Dates
The current IRS policy states that most electronics purchased after December 31, 1986, can be depreciated over a period of up to five years. If you purchased a printer in 2018, you can depreciate its expense in the following tax years: 2018, 2019, 2020, 2021 and 2022.
Depreciation of Laptops, Computers and Information Systems
The IRS classifies laptops, computers and similar electronics into the category of "information systems." It is assets classified within this category that you may depreciate over a period of up to 5 years. For small businesses, these sorts of electronics may be the bulk of the electronics you purchase in a given year, and therefore perhaps most relevant to your tax-year depreciation questions. If you aren't sure whether a given purchase falls under this category, it's best to ask a tax professional rather than guess.
IRS Publication 946 offers a great deal of useful information pertaining to electronics depreciation. In addition, it offers an alternative electronics depreciation calculation method, which applies if you've used your electronics less than 50% of the time for business purposes. For many small business owners, this may prove the case when it comes to laptops or tablets--if you are relying on one computer for home and office use, be sure to accurately estimate the percentage of time you've spent with the device for each. It is important to depreciate your information systems assets using the correct calculation method.
IRS Section 179: Electronics Deductions
If you have used your laptop, computer or other information systems asset for business purposes more than half the time, you may also be eligible to partake in a complete deduction for the cost of the item in the year that it is purchased. Say you buy a laptop for $1500 in 2019 and use it solely for business, never bringing it home or checking your personal social media accounts on your lunch break. You are then able, per Section 179, to deduct the entire value of the item.
The IRS limits this sort of same-year depreciation benefit to items up to $1,000,000. In addition, if you traded in an old piece of electronic equipment to put towards the cost of your new one, you may not deduct the trade-in amount from your one-year depreciated value amount. For instance, if you had an old laptop that the electronics store valued at $300 and put toward your $1500 new laptop, you may only deduct the one-year depreciation value of $1200 on your 2019 taxes.
When Does Electronics Depreciation Begin?
The depreciation of an electronic asset begins the year that asset is put into use. Whatever laws and rules apply during that year become the standard for calculating depreciation over the lifetime of that asset. As such, it's critical that you keep up on information systems and other electronics rules and ask a tax professional whenever you are unsure if an asset may be depreciated. Depreciation rules change frequently, as well, particularly when it comes to new technologies like electronics.
Tax Depreciation of Common Assets
In some cases, the IRS will allow business owners to select their desired method of depreciation; in many cases, however, the IRS has already done the work and made the decision. The most important thing to understand when it comes to depreciation calculations that relate to taxation is that once a method is chosen for a particular asset, that method may not change until the asset has been entirely depreciated. When it comes to your electronics, this means that you can use either the one-year deduction method or the five-year depreciation method, but can't start with the latter and later use the first.
Also, the U.S. does not allow business owners to create their own systems. For example, a computer must depreciate over five years on a company’s tax filings no matter if it’s obsolete in three years or 13. Keep this in mind when determining how you will depreciate your heavily used electronics. In some instances, it may behoove your business to deduct the entire value under Section 179 in the year of purchase if you feel the item may become obsolete or won't hold up for the full five years you can claim it.
- TechRepublic: How to Calculate Depreciation on Computer Hardware: A Cheat Sheet
- IRS: Publication 946 - How To Depreciate Property
- IRS: About Publication 946, How to Depreciate Property
- IRS: Topic No. 704 Depreciation
- Internal Revenue Service (IRS). "Topic No. 704 Depreciation." Accessed July 26, 2020.
Danielle Smyth is a writer and content marketer from upstate New York. She has been writing on business-related topics for nearly 10 years. She owns her own content marketing agency, Wordsmyth Creative Content Marketing (www.wordsmythcontent.com) and she works with a number of small businesses to develop B2B content for their websites, social media accounts, and marketing materials. In addition to this content, she has written business-related articles for sites like Sweet Frivolity, Alliance Worldwide Investigative Group, Bloom Co and Spent.